Canadian producers can meet U.S. oil demand even without Keystone, executive says

TORONTO • Calling Canadian heavy oil logistical challenges “overblown,” a senior oil sands industry executive says other pipelines and rail projects are available to meet rising demand from Alberta producers who until recently have been counting largely on the controversial Keystone XL pipeline to move their product to the United States.

But he may be pitching the merits of a pipeline that no longer matters. Continue reading.

“Misconceptions are common,” Doug Proll, executive vice-president with Canadian Natural Resources Ltd. said Tuesday. “There is ability to meet the supply even without Keystone XL. For the next little while, market access should not be constrained as result of other options.”

Enbridge Inc.’s debottlenecking of the Mainline pipeline will facilitate 400,000 barrels per day to the United States, while TransCanada Corp.’s west-to-east pipeline and the southern leg of the Keystone XL, along with a number of other proposals, expansions and added rail capacity mean Canadian producers have a number of outlets to get to market.

CNRL is planning to spend $2-billon to $2.5-billion annually over the next three years to take production from its Horizon Oil Sands development to 250,000 bpd from its current level of about 100,000 bpd.

The Calgary-based company’s Kirby Phase 1 project is also expected to begin this month with a capacity of 40,000 bpd.

Mr. Proll’s comments, made during a presentation at an industry conference in Toronto, echo a report from investment bank Canaccord Genuity on Monday that said new pipeline and rail terminal proposals mean Keystone XL is “no longer a necessity.”

Related

“The start-up of Keystone Southern Leg (aka, the Gulf Coast project) in late 2013 or Q1/14 and Flanagan South line in mid-2014 means we should see ample excess capacity to end markets through at least the end of 2018 even without Keystone XL approval,” Canaccord analysts Phil Skolnick and Steve Toth said in a note to clients.

Many Canadian producers are resigned to the fact there is considerable uncertainty whether U.S. President Barack Obama will approve the Alberta-to-Gulf Coast project, and are seeking different ways to get output to market.

The new market access channels are also lifting potential asset valuations in the oil patch.

“Keystone XL is not the 500-pound gorilla in the room that it once was,” said a Calgary-based lawyer who asked not to be named. “It is still of material consideration, but it’s probably less of an impediment than it was 12 months ago.”

As pipeline approvals face environmental opposition and regulatory delays, Canadian companies will spend US$1-billion on new oil rail terminals in Western Canada during the next two years, with an additional US$4-billion to US$5-billion expected to be spent on new rail cars, said Peters & Co. Ltd.

Cenovus Energy Inc., another major oil sands developer, is taking a “portfolio” approach to transportation, and looking to participate in rail terminals with the prospect of sending as much as 30,000 barrels per day by rail, up from its current levels of 10,000 bpd, said Brian Ferguson, president and chief executive officer of the Calgary-based company.

“We are currently benefiting from firm service capacity of 11,500 barrels per day on the existing Trans Mountain pipeline to the West Coast. It was recently announced that Cenovus has secured 200,000 barrels per day of firm service from TransCanada’s Energy East project that’s going to transport barrels to Saint John, New Brunswick for both domestic and export markets,” Mr. Ferguson said at the conference, organized by Peters & Co.

Mr. Ferguson also dispelled the notion that the oil sands are a high-cost proposition.

“Probably, the largest misconception I believe about oil sands developments is that it is the marginal barrel; that it is high cost,” said Mr. Ferguson, noting the company’s costs at its Foster Creek and Christina Lake projects are about US$35-US$45 per barrel, compared to the global average supply costs of US$70 per barrel.

Cenovus aims to more than double production to 500,000 bpd within a decade, and has achieved first oil from its Christina Lake E project. It has also begun construction on its third SAGD project at Narrows Lake.

The company is also looking to develop the Telephone Lake after abandoning search to find a buyer for the development last year.

“Telephone Lake has excellent reservoir quality and we expect ultimate production capacity in excess of 300,000 barrels per day and it is 100% Cenovus project,” Mr Ferguson said. “We continue to work through our pilot programme at Telephone Lake and anticipate regulatory approval for this project next year.”

Other producers are also shrugging off market constraints and focusing on new project developments.

Suncor Energy Inc. said it’s making “excellent progress” with its partners Total SA and Teck Resources Ltd. for their joint Fort Hills oil sands project, which contains four billion barrels in reserves.

The partners “continue to target a sanction decision later this year,” said Sneh Seetal, spokesperson at Suncor.

Meanwhile, a Dundee Capital Markets analyst says the project is likely to go ahead, after a meeting with Teck officials.

“We believe consensus expectations (both sell- and buy-side) are that Fort Hills will likely be given the green light, especially when reading between the lines of Suncor’s conference call when the company is talking up the resource quality of Fort Hills relative to Joslyn,” said Maxim Sytchev, analyst at Dundee in a note to clients last week.

The project could cost as much as $14.7-billion, Mr. Sytchev estimates.

Peters & Co. expects around 350,000 barrels per day of new oil sands production to enter the market over the next 12 months.

These include Imperial Ltd’s 110,000-bpd Kearl project, Suncor’s debottlenecking of existing projects to wring out another 60,000 bpd and 40,000 from MEG Energy Inc.